Coku-cola and Pepusi are two duopoly cola brands in the coke market. A market research had been conducted to show the preference of the customers. In the research, one of the element of coke, sweetness, was evaluated, scaling 0 to 1, as an indicator from lighter to sweeter. Based on the research, customers who preferred lighter coke would tend to choose Coku-cola, whereas customers who preferred sweeter coke would choose Pepusi. Investigators also found that the willing-to-pay price of the customers toward their preference was based on the scale of sweetness. The intangible cost to force a sweet-preferred customer to choose a light coke is $1, vice versa. For example, a customer who prefer 0.6 sweetness would buy a perfectly light coke by adding cost $0.6 or buy a perfectly sweet coke by adding $0.4. The sweetness of both brands were tested by a sweetness tester. The result came out that the sweetness of Coku-cola is 0 while the sweetness of Pepusi is 1. Assume the preference of customers toward sweetness is uniformly distributed from 0 to 1 in the market, and all customers would buy a single bottle of coke. a. Determine the equilibrium price of the two coke brands if customers would choose the brand with less cost. b. Determine the equilibrium price if the intangible cost is raised to 2.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Transcribed Image Text:Coku-cola and Pepusi are two duopoly cola brands in the coke market. A market research had been conducted to show the preference of the customers. In the research, one of the element of coke, sweetness, was evaluated, scaling 0 to 1, as an indicator from lighter to sweeter. Based on the research, customers who preferred lighter coke would tend to choose Coku-cola, whereas customers who preferred sweeter coke would choose Pepusi. Investigators also found that the willing-to-pay price of the customers toward their preference was based on the scale of sweetness. The intangible cost to force a sweet-preferred customer to choose a light coke is $1, vice versa. For example, a customer who prefer 0.6 sweetness would buy a perfectly light coke by adding cost $0.6 or buy a perfectly sweet coke by adding $0.4. The sweetness of both brands were tested by a sweetness tester. The result came out that the sweetness of Coku-cola is 0 while the sweetness of Pepusi is 1. Assume the preference of customers toward sweetness is uniformly distributed from 0 to 1 in the market, and all customers would buy a single bottle of coke. a. Determine the equilibrium price of the two coke brands if customers would choose the brand with less cost. b. Determine the equilibrium price if the intangible cost is raised to 2.

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